In the classical definition, a market maker in exchange trading is a financial organization (firm) that undertakes to ensure the liquidity of a particular stock on the exchange. These are mainly large banks, brokerage companies, and dealing centers. The market maker is literally “a market maker”, he participates in the market process so that the market is viable. There are many market makers in the markets and they are all professional participants in exchange trading. They work according to the rules of the exchange and in accordance with financial legislation. Market makers enter into contracts with exchanges, where they undertake to ensure the liquidity of certain stocks, futures, currencies. That is, they should buy and sell financial instruments even if there are no sellers or buyers. In addition, market makers bring buyers and sellers together as an intermediary in transactions. By collecting applications for the purchase and sale, market makers and form the prices.
Forex Market Makers
Market makers have always existed since the advent of exchanges. But with the advent of the international currency exchange market (Forex), their value has grown significantly. The volume of operations on the Forex market is now more than $ 5 trillion. A significant part of the operations falls on market makers. More than 50 percent of this turnover is provided by four European banks. These are English RBS and Barclays, German Deutsche Bank and Swiss UBS. A relatively large share is held by American banks Bank of America, Goldman Sachs, JP Morgan, Morgan Stanley.
The cost of a standard contract in the Forex market is $ 5 million. It is clear that ordinary traders and many banks cannot handle such amounts. Therefore, market makers collect smaller applications into the so-called “pool”. Large brokerage companies (prime brokers) submit applications to “pools”. Prime brokers themselves accept applications over $ 10,000 from retail brokers, in which ordinary speculator traders trade.
Modern market maker features
If you divide the total trading volume into a standard contract, you get more than a million operations per day. Given that the market is not active around the clock, up to a million contracts can be completed hourly. That is, Forex liquidity is complete. It turns out that in the current foreign exchange market the role of market makers has changed somewhat. Forex regulation applies to them. They earn mainly on the difference in purchase and sale prices when executing customer orders. Market makers have the right to trade currency at their own expense. Hence the rumors that they are driving prices on their own. In fact, market makers buy and sell currency only when the number of sellers or buyers has significantly decreased in the market due to some event. Thus, they stabilize prices and prevent chaos. But they sell currency at a very high price (spread the spread), reducing demand, and they buy at an understated price, reducing supply. In addition, the market maker immediately creates the opposite position or buys futures to prevent their own losses. That is, in fact, market makers do not move prices, but fulfill their main task of ensuring liquidity.